Fed’s Evans Wants More Wage Growth Evidence to Raise Rates

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Federal Reserve Bank of Chicago President Charles Evans said the Fed should wait for more evidence that wages are rising before raising interest rates, and he repeated his call to hold borrowing costs near zero until 2016.

Evans, a voter on policy this year who has often argued that the central bank should be in no hurry to tighten, said the 0.7 percent first-quarter increase in the employment cost index was a possible early sign of wage pressures that could help the Fed achieve its goal for higher inflation.

“If all of the other wage measures were to move in a similar fashion, if the ECI were to continue to come in like that, that would be moving toward the direction that would provide me more confidence,” Evans told reporters after a speech in Columbus, Indiana on Monday.

The comments were his first since the Federal Open Market Committee repeated on April 29 that it wants to be “reasonably confident” inflation is rising toward its 2 percent goal before liftoff.

Officials, who dropped a promise in March to be patient on raising rates, say they can act at any FOMC meeting from their gathering on June 16-17 onward. Most expect to move later this year. Rates have been kept near zero since December 2008.

Evans said the economy could absorb an early rate rise, provided the subsequent path of increases was gentle.

Shallow Path

“A properly shallow path of increases, even if we were to increase rates sooner than I would like, could still be quite supportive of continued strong economic recovery, hopefully continued increases in inflation,” said Evans, 57.

The Fed’s preferred gauge of price pressures rose by 0.3 percent in March from a year ago and has been under its target for 35 consecutive months.

“Economic activity appears to be on a solid, sustainable growth path, which, on its own, would support a rate hike soon,” he said in the speech. “However, the weak first-quarter data do give me pause, and I would like to see confirmation that they are indeed a transitory aberration.”

The advance in first quarter ECI, which includes benefits, followed a 0.6 percent increase in the previous three months. Other gauges of worker pay have been mixed, with average hourly earnings rising 2.1 percent in March from a year earlier, close to the 2 percent average since the start of the expansion.

Evans said wage growth over the last 5 years had averaged 2 percent to 2-1/2 percent, which was well below the 3 percent to 4 percent range he said was consistent with an economy in which inflation was close to the Fed’s goal.

Corroborating Evidence

“Faster wage growth would be good corroborating evidence that inflation was on its way up,” he said.

Echoing the FOMC statement last week, Evans said soft first-quarter growth was partly a result of transitory influences, although officials should wait for proof of a second-quarter rebound before deciding to tighten policy.

The economy expanded at a 0.2 percent percent annualized pace in the first quarter, down from 2.2 percent in the previous three months, restrained by harsh winter weather, the stronger dollar, lower oil prices, and delays at West Coast ports. Growth will rebound to 3.1 percent in the second quarter, a Bloomberg survey of economists shows.

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